The Bank of Canada’s latest monthly financial statistics for chartered banks show continued growth in household credit, but no pickup in business credit, reports TD Economics.

Household credit continued to grow in August, rising by 0.6% on a month-over-month basis and by 8.4% on a year-over-year basis. While still positive, the rate of household credit growth is slowing. In particular, TD points out, “Given the rate at which the housing market has begun to cool, it is unlikely that the current pace of mortgage growth will persist.” It expects existing home sales to fall through the remainder of this year and through the first half of 2011.

“The deceleration in household credit growth in August is likely the harbinger of the expected slowdown in household spending,” TD concludes. “After driving much of the economic recovery through debt-fuelled consumption, household debt levels are now at their highest level on record. In conjunction with the slowdown already in progress in the housing market, both consumer and mortgage credit growth will likely be constrained in the coming months.”

At the same time, the Bank of Canada’s data reveals that credit to non-financial firms contracted for the fifth consecutive month in August, declining by 0.3% on a month-over-month basis. “Business credit has not risen since the end of the recession and has been consistently declining since January 2009,” TD says, adding that “the trend appears to be improving as the year-over-year growth rate moved to -8.2% from its low of -16.4% recorded in December 2009.”

Indeed, TD says that every component of business credit is recording an improvement in year-over-year growth rates as the declines shrink. “This continues to give us reason to be optimistic,” it says, as it expects business investment to be a major driver of economic growth through the latter half of 2010 and into 2011.

“A low interest rate environment, increased capital cost allowances, the HST implementation, continued improvement in corporate profits, and an elevated Canadian dollar should all prove to be supportive in the coming quarters,” TD adds. “This is likely to provide a boost to overall chartered bank credit growth, but will likely be slightly muted by the slowdown in household credit. Likewise, a muted pace of credit extension will translate into a moderate pace of deposit growth.”

Overall chartered bank deposits also increased by 0.3% in August, TD reports. And, chartered bank assets grew by 0.6%, led mostly by a 3.1% gain in longer-term government bond holdings and a 3.0% increase in Canadian securities, which was partially offset by declines in short-term asset holdings, particularly T-bills.

IE